Bruce Andrews, partner of Alderman & Company, the aerospace and defence Mergers and acquisitions bankers, takes the opportunity to assess prospects for 2025 and the year draws to a close
In this month’s article, we share our views about mergers and acquisitions (M&A) activity in the commercial aviation industry in the year ahead.
EY, the global accounting and consulting firm, recently released a forecast outlining its rationale for predicting a 10% increase in M&A activity across all industries in 2025.
The report, which is available on their website, predicts a 16% increase in M&A activity by PE firms and an 8% increase in activity by strategic buyers.
In the commercial aviation industry, we believe the year ahead may be consistent with the EY overall forecast, but we note there are factors that could cause M&A activity in the commercial aviation industry to increase by more than 10% in the year ahead.
We also present a contrarian view, with reasons why there might be a decline.
We start this discussion with the negative, for two reasons: 1) because it’s always nicer to end on a positive note, and 2) we believe the upside is more likely than the downside.
In regard to the negative, there are two primary risks that we have identified that might reduce M&A activity in the commercial aviation industry in the year ahead.
The first is a reduction in consumer spending, and the second increased trade-friction relating to aircraft production, above and beyond the current state of WTO action.
In regard to consumer spending, everyone in the commercial aviation industry realises that airline tickets are, for the most part, a discretionary good.
While business travel may be slightly more inelastic, all air travel is elastic, as we all saw far too well during the pandemic.
Accordingly, if there is a recession in 2025, air travel would decline and that would result in lower earnings for the industry and that would result in lower M&A volume.
While a recession is possible, as of the writing of this article, few economists are predicting one in 2025.
In regard to trade friction, US President-elect Donald Trump has stated that he intends to increase the use of tariffs as part of his administration’s economic policies.
Economists are trying to assess what this might mean to the US economy, the global economy, and specific industries.
However, as of the date of the writing of this article, there is not sufficient information to make credible assessments of the potential impact of these potential changes to US trade policy.
Our view of the situation is that there is probably more downside to the global commercial aviation industry than there is upside.
Because so little information is available about specific US policy changes and so little is known about the potential impact of those policy changes, the conservative forecasting position is for us to put this issue (trade friction) into the camp of “possible downsides”, as we develop our forecast for M&A activity in the year ahead.
As for the upside, we see three reasons why M&A activity could increase by more than 10% in 2025.
First, M&A activity in the sector has been down substantially over the past two years for numerous reasons, which has resulted in significant pent-up demand.
In 2022, M&A volume in the sector was down 21% from 2021. In 2023, volume was down further, with a decline of 37% from 2021.
Eleven-month results for 2024 show a small recovery in volume but not enough to clear the pent-up demand that we are seeing.
Second, air travel is at the highest level ever, which is driving airline profits to record levels which has a trickle-down effect on all suppliers to the airlines and suppliers to those suppliers.
The US Transportation Security Administration (TSA) set a new single-day record on December 1, 2024, with 3.1 million US air travellers.
This was the second time the number of passengers checked in on a single day surpassed 3 million.
The previous record was set on July 7, 2024, with 3.01 million. When a company’s customers (or its customers’ customers) are generating record profits, it bodes well for that company’s earnings.
As we have seen over the 23-year history of our firm, nothing has a greater impact on M&A values than earnings, and nothing has a greater impact on M&A volume than M&A values.
Finally, the third upside opportunity that we see relates to interest rates. Rates have been falling recently. The 30-day SOFR, which peaked at 5.35 this summer, is now below 4.6%.
Lower interest rates result in lower acquisition financing costs, which typically lead to increases in M&A volume across all industries.
While it is always difficult to predict future M&A volume, we respect EY’s forecast that overall M&A activity will increase by 10% in 2025.
While there are factors that might cause this to be lower (as we discussed above), we see specific factors that could cause M&A activity in the commercial aviation industry to increase by more than 10% in the year ahead.
Happy Holidays everyone.
The post City Insider: Why we’re positive about M&A activity in commercial aerospace in 2025 appeared first on Aviation Business News.
